China

Lessons from Apple's iPad Adventure in China

Apple (AAPL) won a much-needed victory in China today, with a Shanghai court rejecting a request to halt iPad sales in the city. The Shenzhen unit of Proview International Holdings had requested the ban, part of its increasingly bitter dispute with Apple over rights to the iPad trademark. The two sides are now looking ahead to Feb. 29, when a court in Guangdong is scheduled to rule on Apple’s appeal of a lower court decision that the U.S. company’s 2009 purchase of the trademark from a Taiwan-based unit of Proview was invalid.

If even all-powerful Apple has to slug it out with an obscure Chinese rival in order to control the name of one of the world’s most popular electronics products, what are mere mortals supposed to do? I spoke with some experts in China to find out. Here are some lessons for students in Doing Business in China 101. And don’t let the title mislead you: As Apple has demonstrated, even companies that have been buying and selling in the Chinese market for many years could benefit from some reminders of these basics.

Get government on your side. As Apple’s Proview problem has spread, central government officials seem to have stayed on the sidelines, preferring to allow the courts to handle it. That might turn out to be the right move, since it allows Beijing leaders to avoid taking sides. If you’re Apple or some other foreign company caught up in a dispute with a local player, though, it would be nice to know you have government officials on your side who can make problems go away. “You need to have government cover, to avoid the stuff that’s happening with Apple,” says Mark Hass, Beijing-based president of public relations and government affairs specialist Edelman China.

To make sure the government has your back, companies need to show goodwill by helping with state priorities such as promoting the development of smaller cities and less prosperous regions in China’s interior. “If you want the government cover that will prevent this kind of thing from happening,” says Hass, “you need to be prepared to lay out more and do more.”

Lobby the regulators. Government relations are more complicated in China than in many other countries. Since the country is ruled by the Communist Party, law and policies get made in the dark and there’s no independent media. And if things weren’t complicated enough, there’s another element of complexity in China: the GONGO. In the West we have nongovernmental organizations; in China, where the government is typically suspicious of NGOs and what they’re up to, there are groups known as government-organized nongovernmental organizations. Yes, that might seem comically illogical, but in China these GONGOs play an important role in policymaking and companies need to be aware of how to work with them, says Gregory Gilligan, managing director in Beijing for Apco Worldwide. “They are another arm of the government,” he says. “They are acting in some senses as outsourcing of government functions.”

Companies need to develop close ties with officials at GONGOs as well as the actual ministries that have authority over them. And there can be a lot of them. “Depending on what business you are in, you may have to deal with a dozen different regulators on a regular basis,” Gilligan says. “Just mapping out who all those stakeholders are is critical.” Keeping in close touch with those regulators is more time-consuming than in other countries, he adds. “The level of interaction with regulators is much greater in China. If you are doing your job right, it’s weekly.”

Buy your trademark. To figure out who owns what names, foreign companies typically employ specialists that monitor trademark registrations in China and other countries. Once they’ve identified potential problems, companies then try to buy back the rights to those names. When negotiating with Proview for the rights to the iPad name, Apple worked through an intermediary, a company it set up to do the negotiations and buy the trademark. This is a common way for foreign companies to get a better deal for themselves, according to Stan Abrams, a law professor at Central University of Finance and Economics in Beijing who also writes the China Hearsay blog. “It happens every day,” he says, “to make sure the companies that are looking to purchase these trademarks are not taken advantage of in terms of price.”

Transfer the trademark properly. This might have been one of Apple’s major blunders, according to Abrams. When concluding its deal with Proview, he says after looking at a copy of the original contract between the two, Apple didn’t get an agreement from the Chinese company to submit the deal to the government’s trademark office, part of the State Administration of Industry and Commerce. The missing link? A signature. According to the rules, “you need the trademark owner to sign the application to transfer the trademark,” says Abrams. “If Apple had that, it could have taken that to the trademark office and never have to deal with Proview again. But for whatever reason, they didn’t require Proview to sign that at the time they signed the contract.” Recently, he adds, the government has added another step to the process, with the trademark office contacting the seller after receiving the signed document, just to make sure the seller wants to sell.

That gives a lot of leverage to the seller, should it decide to play hardball with the foreign counterparty, and that’s why Abrams says companies should wait until the transfer is complete before making full payment. Apple paid the full amount before that transfer went through. “Don’t pay all the money up front,” he says. “If you need cooperation from someone later, either be confident you can rely on that contract and enforce it in court, or withhold some of the money.”